Even Bond Vigilantes in Japan…Will the Shock Be Stronger Than the 2024 Yen Carry Unwind?

As U.S.–Japan interest rate dynamics flip, are markets ready for another shock?

When we compare recent U.S. and Japanese policy directions to those of August 5, 2024, both similarities and sharp differences emerge. What’s more concerning now is that the current environment may produce far worse outcomes than what we saw then.

Flashback: August 5, 2024

At that time, markets were worried about a U.S. economic slowdown, and the Federal Reserve hinted at not just one, but multiple rate cuts. Meanwhile, Japan went in the opposite direction. On July 30–31, 2024, the Bank of Japan (BOJ) raised its benchmark rate to 0.25%, and the BOJ governor signaled aggressive future hikes.

This divergence—U.S. easing versus Japanese tightening—was the trigger for a yen carry trade unwind.

Japan was experiencing solid growth, while the U.S. was showing signs of fatigue. As the rate differential narrowed, the appeal of borrowing in yen to invest in U.S. assets faded quickly. This led to a rapid reversal of capital flows and a brief panic sell-off across global assets.

Fortunately, both central banks responded swiftly with calming statements, and investors regained confidence through what can be described as a “psychological rebalancing.” Markets stabilized and rebounded. But today, we face an entirely different setup—this time, it’s not psychological but structural.

Not a Sentiment Problem—A Structural One

In 2024, the U.S. was heading into an election. The Biden administration had strong political motivation to stabilize asset markets quickly. Japan, in turn, had every reason to cooperate with the U.S. and avoid further turbulence.

Now in 2025, Trump’s administration is operating on a completely different logic.Its central agenda is technological dominance, which requires massive capital investment. This capital is expected to come through increased government borrowing—meaning long-term yields must fall and funding costs must remain low. Hence, the U.S. has strong incentives to slash rates.

Additionally, the U.S. wants to devalue the dollar while keeping its allies’ currencies strong. In this asymmetric trade setup, America sells, and allies like Japan buy. A stronger yen is necessary—and that only comes with higher Japanese interest rates.

Meanwhile, domestic conditions in Japan also point toward rate hikes. As of June 2025, Japan’s headline inflation is 3.3%, and core CPI stands at 3.7%, while the policy rate remains at just 0.5%. Real wages continue to decline, worsening household sentiment. Monetary tightening is no longer optional—it’s politically necessary.

The Return of the Bondholder Vigilantes

But the issue doesn’t stop at monetary policy.

As part of its trade deal with the U.S., Japan agreed to purchase $550 billion in U.S. Treasuries, adding to its already massive debt load. Simultaneously, Tokyo is under pressure to fund domestic AI and infrastructure initiatives. This means more bond issuance.

As yields rise, bondholders become increasingly unwilling to hold low-return government paper. These investors—nicknamed “bondholder vigilantes”—begin to offload JGBs aggressively. This naturally pushes yields even higher, putting further pressure on BOJ to hike rates. The hope that Japan can avoid more rate hikes is, by now, a fantasy.

Not Just a Panic—A Full-Fledged Structural Risk

Put it all together:

• The U.S. desperately wants to cut rates,

• Japan must raise them.

The rate differential between the two economies may collapse—or even reverse.

Compounding this, the U.S. recently secured a trade deal with tariffs of 15–20%, significantly higher than the previously anticipated 10%. These elevated tariffs could hurt real economic growth, putting downward pressure on U.S. GDP. If growth slows while rates drop, the perfect conditions for a yen carry unwind would materialize.

We’ve seen this before. In 2024, Japan’s Nikkei dropped from 41,000 to 35,000, and Bitcoin and Ethereum fell 30–60%. But back then, both governments had strong incentives to hit the brakes. Now, both governments are motivated to press forward, regardless of market volatility.

Investment Strategy: The Rally May Be a Chance to Raise Cash

Investors should not mistake the current rally for stability. This is not a short-term correction—it may be the start of a structural repricing. While markets are still rising, this could be the perfect window to increase cash positions and prepare for the next cycle.

Warning signs are beginning to flash. The correction, when it comes, may run deeper than in 2024. What’s needed now isn’t an emotional reaction—but a strategic one. This liquidity-driven rally could prove powerless in the face of structural realignment.

Because this time really is different.